Risks flagged in broker-linked mortgage controls

by Miklos Bolza28 Apr 2017
A heavy reliance on mortgage brokers could be a potential pain point for lenders if economic conditions change, according to one credit and investment expert.

Damien Wood, principal at specialist investment firm Spectrum Asset Management, said that with more than half the mortgage market originating from brokers, the financial health of certain lenders could be at risk if mortgage losses begin to rise.

In a recent Spectrum Insights article, Wood said the link between broker commissions and the volume of loans written raised concerns especially compared to bank staff who were primarily motivated by “a broader range of benefits including developing a career as a banker.

“The downside for a mortgage broker, if bad loans are written, is some foregone trailing commission in the future,” he said.

Speaking to Australian Broker, Wood noted that while this potential loss of income may disincentivise brokers from writing bad loans in the first place, how effective this was at achieving this would depend on the comparative weight between upfront and trail.

In his article, Wood said that mortgage defaults were a main contributor to the global financial crisis in the US. A third of mortgages originated from brokers nationally with these loans having higher default rates than bank-sourced mortgages, he added.

However, he admitted it was up to the banks to mitigate any risks involved with third party lending.

“The onus is on the banks to do so. The problem is we don’t know how good their controls are until there is an uptick in defaults, which will happen one day.”

With the banks taking the “ultimate risk,” they should be responsible for any consequences, he said.

Wood expressed concern that different banks had different standards when vetting mortgage applications with some being more effective than others.

“The problem is until the tide goes out, you just won’t know who’s wearing trousers and who’s not.”

Finally when asked whether measures such as serviceability buffers were reducing this risk, Wood said that fabricated loan documents could undo these added precautions.

“I’m sure the bulk of applications are fine. There’s just going to be the marginal guys – the broker or the bank – trying to get the deal and the volumes done. These numbers work well when prices are going up for property, jobs are freely available, and interest rates are low. But when one of these factors changes, it will then test whether buffers are applied appropriately to everybody.”

Since banks were leveraged 15 times with regards to mortgages, it would take just a few mistakes to have a material impact on the lender’s performance, he warned.

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COMMENTS

  • by Denis Hill 28/04/2017 8:53:35 AM

    Being a finance broker for 12 years and a banker before that I would really like to know where all these easy lenders are that keeps getting talked about on these pages. Every week I read the same thing that its the brokers fault if the economy and banking system colapses because we get loans through that are very poor quality.
    Tell me the lender who does this so I can send them some deals.
    I find all the lenders I deal with have very strict serviceability and lending guidelines.
    I have to work very hard to get very good quality loans through especially investment loans over the past 12 months.
    Some of these people having track records going back 20 years and have never missed a payment on any lending but are scutinised to the enth degree.
    All the lenders I deal with have interest rate serviceability tests at over 7% and take between 65% and 80% of rental income.
    Where is the easy lending in that????

  • by Country broker 28/04/2017 10:47:21 AM

    I really get quite amazed at the assertions of some so called experts.
    As a broker for 14 years and in mortgage finance and banking before that , I am finding that the banks and other lenders have as strong as ever credit standards. They are testing capacity with rates well above what they were, it not the broking industry fault that over 50% of home loans are now sourced via the third party channel, more like good management and determination. The vetting of broker origionated deals is as strong as ever
    I also take issue saying simply the start of the GFC was due to 1/3 of loan being in arrears, is hard to swallow , what about 105% loans, on fixed rate ( do not and never have existed in Australia) . selling of Mortgages as AAA rated when they were not , selling CFD deposits and so on.

  • by bettina westaway 28/04/2017 11:47:22 AM

    Having been in the broking industry for 12 years I too am thinking this is a badly investigated article or badly written based on a persons opinion and assumptions. What happened in the states was caused by greed and a lack of controls. The Australian mortgage industry has a high level of lending criteria serviced by mortgage professionals who provide an excellent service resulting in capturing the biggest market share. Should the Australian economy decline due to lack of good governance is not the fault of the broker. Should borrowers default on loans due to the economy shrinking even further if not the fault of the broker. While the economy is fairing well borrowers meet their loan commitments. Should the borrowers lose their full time employment and default, will this be blamed on the broker? We are not in charge of the economy, be that internal or global.